The new build lending market outlook in the UK is seeing growing confidence, competition and activity but is clouded by a dependency on Help to Buy, it is claimed.
Help to Buy equity loans made up 27% of all new housing completions and 5% of all housing transactions between April 2013 and March 2017, backed by £21 billion of Government funding to 2021.
However, according to the Intermediary Mortgage Lenders Association (IMLA) there needs to be a solution beyond 2021 which avoids any cliff edge and maintains progress in the new build market.
In a new report the IMLA says Britain’s new build market needs to confront its dependency on the Help to Buy equity loan scheme along with growing new home ‘premiums’ and issue of leasehold sales.
The report, Keeping Britain building: mortgage lending in the new build sector, explores progress made in mortgage lending on new homes since the 2007/2008 recession and the remaining challenges for industry and Government to tackle. In doing so, it considers how lenders’ confidence to lend on new build property has grown substantially in recent years, despite its continuing specialist nature.
It says that this has been helped by increased lender confidence in this market, reflected in higher loan to value limits on new build and less restrictive site exposure limits, more dialogue with house builders, a shift in the mix towards houses and away from flats, reducing to a degree the risks of price volatility, and a range of controls including greater disclosure on builder incentives involved in new build purchases.
At the same time, it points out that the Help to Buy equity loan scheme has helped maintain lending to first time buyers and others on new properties and drive up lender competition.
However, the IMLA report highlights concerns over this level of dependency, and suggests that withdrawing the scheme without replacement on its current timetable might weaken the new build market to the detriment of borrowers, Government, house builders and lenders.
It calls on mortgage lenders to actively work with government and house builders to inform decisions on a future replacement scheme beyond 2021. Lenders saw their exposure to credit risk increase with the shift from NewBuy to Help to Buy, while buyers under the latter scheme have the ongoing liability of an equity loan with interest to pay after five years which kicks in next year for 2013’s early adopters.
The report also highlights the issue of new build valuations and calls on valuers to remain vigilant towards unjustified new build premiums. While the advantages of purchasing a new home, such as an NHBC guarantee and lower running costs, justify a higher price, the premium has risen significantly in recent years and has been impacted by less sustainable factors including builder incentives and even Government support schemes such as Help to Buy.
Lastly, it suggests that the use of leasehold by house builders with the inclusion of onerous ground rent clauses makes it questionable whether some new properties have any substantial long term value. For example, where ground rents double every 10 years, a £250 ground rent will become £8,000 in 50 years and £32,000 in 70 years. Some lenders have stopped lending on these properties altogether, while others approach with caution on a case by case basis.
‘Aside from the impact of any decisions on the future of Help to Buy, lender sentiment towards new homes is influenced by the new build premium, builder incentives and ongoing concerns about the UK housing supply model which for a variety of reasons has consistently failed to deliver adequate number of homes to meet demand,’ said Peter Williams, executive director at IMLA.
‘Lenders will always see new build as different and, indeed, potentially riskier, but significant progress has been made in the last ten years to put lending activity on a surer footing. Government stimulus has played an important role in stimulating this market, and whether this means on-going support to help buyers with modest deposits to buy new properties is needed beyond 2021 remains to be seen,’ he explained.
‘Industry should stand ready to support initiatives that ensure a healthy supply of new homes for first time buyers with modest deposits, while ensuring that the solution works effectively for lenders as well as housebuilders,’ he added.